Jim Coulter, the founding partner and executive chairman of TPG, which manages $120 billion in investments, has been through seven or eight major market resets and that experience has led him to a form of pattern recognition in how downturns progress.
He says there are “three chapters” in these difficult periods for investors, and the first chapter is now over, or at least close to being complete. The market has now been through the multiple reset, which given where equity valuations were last year, is something investors should have seen coming.
“What was odd is not today, but last year,” Coulter told CNBC on Tuesday from the Aspen Ideas Festival. “Everyone was worried whether it was ‘Alice in Wonderland’ last year,” he said. Though Coulter left some wiggle room in his call that the multiple reset has run its course, noting valuations remains significantly above the 10-year average, “so maybe not quite over,” he said. “Tend to shoot through the average in a moment like this,” he added, and investors need to be prepared for that.
But Coulter thinks the “second chapter” should be the focus now for the next major equity stress: it’s no longer out-of-whack multiples but earnings specifically that are vulnerable.
“We are now going into the second chapter and it is earning, and so far, they are performing well in our portfolio,” he said. But he warned that when an investor looks across the market, “earnings haven’t yet turned over.”
The S&P 500 Index is still showing 10% growth this year and 9% next year, and Coulter thinks inflation will take a big chunk out of that, coursing through supply chains and hitting earnings in many sectors. This doesn’t mean all money should be in cash. Coulter said he is investing in health care, technology and other “high value-added industries” he did not specify, where companies have higher pricing power. And he is not investing in industries where wage inflation is going to pressure margins and firms don’t have pricing power. “They are the most exposed,” he said.
Jim Coulter, TPG Executive Chairman and Founding Partner: Alpha with Impact
CNBC
Coulter said there is lots of cash on sidelines now, but in addition to the industries he mentioned, TPG just did a $750 million deal for a solar developer which speaks to the long-term plays which will always make sense regardless of the exact timing of the deal. But broadly speaking, it’s a bad moment to be spreading bets all around because “the buyer and seller don’t know where to meet,” he said. “We’re right in middle of that … until that meeting of the minds comes, deal activity will lag.”
The private markets where TPG is most active as an alternative asset management firm trail public markets in valuation resets because they are not being valued on a daily basis like publicly traded stocks. But over time this is a catch-up and private equity is coming back into line now, too. Carlyle Group co-chairman David Rubenstein made the same point on Monday from Aspen, telling CNBC that EBITDA multiples are down, but they will “drift down” more.
Eventually, the “third chapter” in Coulter’s pattern will begin, and he has it pegged from some time next year. That’s the landing, and “that’s the question for all us investors.”
Much of the market volatility has been attributed to investor fears that the Federal Reserve will not be able to engineer a “soft landing” and its aggressive rate hikes to combat inflation will result in recession — if the U.S. economy hasn’t already entered one. Fed officials say a recession is not inevitable and it is not their “base case” but some notable CEOs, including Ken Langone, and investors including Cathie Wood, are less sure.
Coulter isn’t placing any bets on a soft landing for the economy. He wants the Band-Aid ripped off. “Personally, I hope it’s hard and fast. When hard and fast happens the market then begins to look forward,” he said. “And if you look at what happens in markets when they turn, it is after a recession hits, if it is going to hit,” he added.
As long as investors remain in the position of watching the Fed “still chasing” as a result of inflation, rather than making the next formal shift in policy, he said the stock market won’t react positively.